UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

 FORM 10-Q

______________________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 000-54382

______________________________________________________

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________________________________________

Maryland		26-3842535
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
11766 Wilshire Blvd., Suite 1670
Los Angeles,	California	90025
(Address of Principal Executive Offices)		(Zip Code)

(424) 208-8100

(Registrant’s Telephone Number, Including Area Code)

______________________________________________________________________

Securities registered pursuant to Section 12(b) for the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐ No  ☒

As of November 10, 2021, there were 93,896,447 outstanding shares of common stock of Pacific Oak Strategic Opportunity REIT, Inc.

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

FORM 10-Q

September 30, 2021

INDEX 

PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	2
		Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	3
		Consolidated Statements of Equity (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	4
		Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2021 and 2020	6
		Condensed Notes to Consolidated Financial Statements as of September 30, 2021 (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
	Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION		57
	Item 1.	Legal Proceedings	57
	Item 1A.	Risk Factors	57
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
	Item 3.	Defaults upon Senior Securities	59
	Item 4.	Mine Safety Disclosures	59
	Item 5.	Other Information	59
	Item 6.	Exhibits	60
SIGNATURES			61

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	September 30, 2021		December 31, 2020
	(unaudited)
Assets
Real estate held for investment, net	$	1,219,531	$	1,272,784
Real estate held for sale, net	—		140,239
Real estate equity securities	96,403		97,903
Total real estate and real estate-related investments, net	1,315,934		1,510,926
Cash and cash equivalents	138,037		60,335
Restricted cash	28,201		13,984
Investments in unconsolidated entities	83,854		79,666
Rents and other receivables, net	24,730		22,212
Above-market leases, net	2,735		3,157
Prepaid expenses and other assets	22,103		19,363
Goodwill	13,534		16,342
Assets related to real estate held for sale, net	—		5,680
Total assets	$	1,629,128	$	1,731,665
Liabilities, mezzanine equity and equity
Notes and bonds payable, net
Notes and bonds payable related to real estate held for investment, net	$	1,023,778	$	1,004,971
Note payable related to real estate held for sale, net	—		94,097
Notes and bonds payable, net	1,023,778		1,099,068
Accounts payable and accrued liabilities	22,054		24,169
Due to affiliate	2,152		2,842
Below-market leases, net	4,436		5,797
Other liabilities	43,994		34,734
Redeemable common stock payable	3,385		864
Restricted stock payable	574		14,600
Liabilities related to real estate held for sale, net	—		669
Total liabilities	1,100,373		1,182,743
Commitments and contingencies (Note 15)
Mezzanine equity
Restricted stock	—		11,009
Noncontrolling cumulative convertible redeemable preferred stock	15,233		15,233
Redeemable noncontrolling interest	2,855		2,968
Equity
Pacific Oak Strategic Opportunity REIT, Inc. stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 94,264,402 and 98,054,582 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	942		979
Additional paid-in capital	820,382		831,295
Cumulative distributions and net income	(322,049)		(325,720)
Total Pacific Oak Strategic Opportunity REIT, Inc. stockholders’ equity	499,275		506,554
Noncontrolling interests	11,392		13,158
Total equity	510,667		519,712
Total liabilities, mezzanine equity and equity	$	1,629,128	$	1,731,665

See accompanying condensed notes to consolidated financial statements.

2

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Rental income	$	29,504	$	23,871	$	94,812	$	67,808
Hotel revenues	12,153		—		24,578		—
Other operating income	923		888		3,118		2,722
Dividend income from real estate equity securities	3,189		2,986		6,693		5,339
Total revenues	45,769		27,745		129,201		75,869
Expenses:
Operating, maintenance, and management costs	10,668		7,888		31,444		22,258
Real estate taxes and insurance	5,262		3,791		15,949		10,570
Hotel expenses	6,483		—		15,715		—
Asset management fees to affiliate	3,422		2,426		10,802		6,867
General and administrative expenses	2,365		1,960		7,120		6,302
Foreign currency transaction loss (gain), net	2,271		445		(568)		(12,338)
Depreciation and amortization	13,895		9,470		45,969		27,417
Interest expense	10,092		6,274		30,713		19,055
Impairment charges on real estate	10,971		—		10,971		—
Impairment charges on goodwill	2,808		—		2,808		—
Total expenses	68,237		32,254		170,923		80,131
Other income (loss):
Gain from remeasurement of prior equity interest	—		2,009		—		2,009
Equity in (loss) income of unconsolidated entities	(569)		519		(144)		1,564
Casualty-related gain	27		—		27		51
Other interest income	55		19		148		297
(Loss) gain on real estate equity securities	(2,614)		(6,527)		12,939		(21,620)
Change in subordinated performance fee due upon termination to affiliate	(1,545)		1,121		(1,745)		814
Gain on sale of real estate	216		—		31,385		—
Gain on extinguishment of debt	1,352		—		1,365		—
Total other (loss) income, net	(3,078)		(2,859)		43,975		(16,885)
Net (loss) income	(25,546)		(7,368)		2,253		(21,147)
Net loss attributable to noncontrolling interests	1,188		43		1,949		115
Net loss attributable to redeemable noncontrolling interest	33		23		113		23
Preferred stock dividends	(191)		(191)		(644)		(788)
Net (loss) income attributable to common stockholders	$	(24,516)	$	(7,493)	$	3,671	$	(21,797)
Net (loss) income per common share, basic and diluted	$	(0.25)	$	(0.11)	$	0.04	$	(0.32)
Weighted-average number of common shares outstanding, basic and diluted	97,659,731		69,225,212		97,879,983		68,179,046

See accompanying condensed notes to consolidated financial statements.

3

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended September 30, 2021 and 2020

(unaudited)

(dollars in thousands)

	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Income (Loss)		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, June 30, 2021	97,906,268	$	979	$	829,294	$	(297,533)	$	532,740	$	12,560	$	545,300
Net (loss) income	—	—		—		(24,516)		(24,516)		(1,188)		(25,704)
Transfers to redeemable common stock	—	—		(1,955)		—		(1,955)		—		(1,955)
Redemptions of common stock	(3,641,866)	(37)		(28,080)		—		(28,117)		—		(28,117)
Change in classification of restricted stock	—	—		21,123		—		21,123		—		21,123
Noncontrolling interest contribution	—	—		—		—		—		20		20
Balance, September 30, 2021	94,264,402	$	942	$	820,382	$	(322,049)	$	499,275	$	11,392	$	510,667
	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Income (Loss)		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, June 30, 2020	69,225,617	$	693	$	553,129	$	(292,096)	$	261,726	$	795	$	262,521
Net loss	—	—		—		(7,493)		(7,493)		(43)		(7,536)
Transfers from redeemable common stock	—	—		6		—		6		—		6
Redemptions of common stock	(601)	—		(6)		—		(6)		—		(6)
Distribution of noncontrolling interest	—	—		—		—		—		(28)		(28)
Balance, September 30, 2020	69,225,016	$	693	$	553,129	$	(299,589)	$	254,233	$	724	$	254,957

See accompanying condensed notes to consolidated financial statements.

4

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2021 and 2020

(unaudited)

(dollars in thousands)

	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Income (Loss)		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, December 31, 2020	98,054,582	$	979	$	831,295	$	(325,720)	$	506,554	$	13,158	$	519,712
Net income (loss)	—	—		—		3,671		3,671		(1,949)		1,722
Transfers to redeemable common stock	—	—		(2,521)		—		(2,521)		—		(2,521)
Redemptions of common stock	(3,790,180)	(37)		(29,515)		—		(29,552)		—		(29,552)
Change in classification of restricted stock	—	—		21,123		—		21,123		—		21,123
Noncontrolling interests contributions	—	—		—		—		—		183		183
Balance, September 30, 2021	94,264,402	$	942	$	820,382	$	(322,049)	$	499,275	$	11,392	$	510,667
	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Income (Loss)		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, December 31, 2019	65,866,765	$	659	$	553,170	$	(277,196)	$	276,633	$	755	$	277,388
Net loss	—	—		—		(21,797)		(21,797)		(115)		(21,912)
Issuance of common stock	24,645	—		262		—		262		—		262
Transfers from redeemable common stock	—	—		567		—		567		—		567
Redemptions of common stock	(78,131)	—		(830)		—		(830)		—		(830)
Distributions declared	—	—		—		(596)		(596)		—		(596)
Other offering costs	—	—		(6)		—		(6)		—		(6)
Issuance of restricted stock	3,411,737	34		(34)		—		—		—		—
Noncontrolling interests contributions	—	—		—		—		—		112		112
Distribution to noncontrolling interest	—	—		—		—		—		(28)		(28)
Balance, September 30, 2020	69,225,016	$	693	$	553,129	$	(299,589)	$	254,233	$	724	$	254,957

See accompanying condensed notes to consolidated financial statements.

5

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Nine Months Ended September 30,
	2021		2020
Cash Flows from Operating Activities:
Net income (loss)	$	2,253	$	(21,147)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in subordinated performance fee due upon termination to affiliate	1,745		(814)
Impairment charges on real estate	10,971		—
Impairment charges on goodwill	2,808		—
Gain from remeasurement of prior equity interest	—		(2,009)
Equity in loss (income) of unconsolidated entities	144		(1,151)
Depreciation and amortization	45,969		27,417
(Gain) loss on real estate equity securities	(12,939)		21,620
Gain on sale of real estate	(31,385)		—
Unrealized loss on interest rate caps	17		10
Deferred rent	(1,529)		(2,559)
Gain on extinguishment of debt	(1,365)		—
Amortization of above- and below-market leases, net	(1,015)		(435)
Amortization of deferred financing costs	2,470		2,481
Amortization of discount on bond and notes payable	1,906		14
Foreign currency transaction gain, net	(568)		(12,338)
Changes in assets and liabilities:
Rents and other receivables	(1,898)		(566)
Prepaid expenses and other assets	(4,371)		(2,286)
Accounts payable and accrued liabilities	(984)		(3,471)
Due to affiliates	(726)		182
Other liabilities	(190)		(142)
Net cash provided by operating activities	11,313		4,806
Cash Flows from Investing Activities:
Acquisitions of real estate, net of cash acquired	(4,107)		(19,034)
Improvements to real estate	(12,923)		(15,946)
Proceeds from sales of real estate, net	194,528		—
Contributions to unconsolidated entities	(4,769)		(1,708)
Distributions of capital from unconsolidated entities	—		1,225
Purchase of interest rate cap	(18)		(6)
Investment in real estate equity securities	—		(35,510)
Proceeds from the sale of real estate equity securities	14,439		10,964
Proceeds for future development obligations	6,203		—
Proceeds from disposition of foreign currency collars	—		14,125
Net cash provided by (used in) investing activities	193,353		(45,890)
Cash Flows from Financing Activities:
Proceeds from notes and bonds payable	157,246		104,143
Principal payments on notes and bonds payable	(233,964)		(57,611)
Payments of deferred financing costs	(2,745)		(2,438)
Payments to redeem common stock	(29,552)		(830)
Payment to redeem restricted stock	(5,656)		—
Payment of prepaid other offering costs	(164)		(606)
Distributions paid	—		(334)
Preferred dividends paid	(644)		(563)
Noncontrolling interests contributions	183		112
Distributions to noncontrolling interests	—		(28)
Other financing proceeds	2,367		—
Net cash (used in) provided by financing activities	(112,929)		41,845
Effect of exchange rate changes on cash, cash equivalents and restricted cash	182		83
Net increase in cash, cash equivalents and restricted cash	91,919		844
Cash, cash equivalents and restricted cash, beginning of period	74,319		88,494
Cash, cash equivalents and restricted cash, end of period	$	166,238	$	89,338

See accompanying condensed notes to consolidated financial statements.

6

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(unaudited)

1.ORGANIZATION

Pacific Oak Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through Pacific Oak SOR (BVI) Holdings, Ltd. (“Pacific Oak SOR BVI”), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, Pacific Oak SOR BVI issued one certificate containing 10,000 common shares with no par value to Pacific Oak Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in, the Operating Partnership. Pacific Oak Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.

Subject to certain restrictions and limitations, the business of the Company is externally managed by Pacific Oak Advisors, LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement (the “Advisory Agreement”) which is currently effective through November 1, 2022; however the Company or the Advisor may terminate the Advisory Agreement without cause or penalty upon providing 60 days’ written notice. The Advisor conducts the Company’s operations and manages its portfolio of real estate and other real estate-related investments.

On January 8, 2009, the Company filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.

The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million. As of September 30, 2021, the Company had sold 6,851,969 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $76.5 million. Also, as of September 30, 2021, the Company had redeemed 27,247,458 shares for $317.3 million. As of September 30, 2021, the Company had issued 25,976,746 shares of common stock in connection with special dividends. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933. On March 27, 2020, the Company issued 3,411,737 restricted shares of its common stock (the “Restricted Stock”) to its former external advisor, KBS Capital Advisors LLC (“KBS Capital Advisors”) pursuant to a Restricted Stock Agreement, dated as of March 27, 2020 (the “Restricted Stock Agreement”). On September 1, 2021, the Company repurchased 584,267 shares of the Restricted Stock for $5.7 million and 2,254,289 shares of Restricted Stock were transferred to GKP Holding LLC (“GKP”), a company owned by Keith D. Hall and Peter McMillan III. See Note 10 for further details.

On March 2, 2016, Pacific Oak SOR BVI filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Series A Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, Pacific Oak SOR BVI commenced the institutional tender of the Series A Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, Pacific Oak SOR BVI commenced the public tender of the Series A Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, Pacific Oak SOR BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%. Pacific Oak SOR BVI issued the Series A Debentures on March 8, 2016.

7

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.     Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2021

(unaudited)

In connection with the above-referenced offering, on March 8, 2016, the Operating Partnership assigned to Pacific Oak SOR BVI all of its interests in the subsidiaries through which the Company indirectly owns all of its real estate and real estate-related investments. The Operating Partnership owns all of the issued and outstanding equity of Pacific Oak SOR BVI. As a result of these transactions, the Company now holds all of its real estate and real estate-related investments indirectly through Pacific Oak SOR BVI.

On February 16, 2020, Pacific Oak SOR BVI issued 254.1 million Israeli new Shekels (approximately $74.1 million as of February 16, 2020) of Series B debentures (the “Series B Debentures”) to Israeli investors pursuant to a public offering registered with the Israel Securities Authority. The Series B Debentures bears interest at the rate of 3.93% per year. The Series B Debentures have principal installment payments equal to 33.33% of the face amount of the Series B Debentures on January 31st of each year from 2024 to 2026.

On January 22, 2020, the Company filed a registration statement on Form S-11 with the SEC to offer up to $1 billion in additional shares of its common stock. This new registration statement contemplates a proposed conversion of the Company to a perpetual-life net asset value or “NAV” REIT that offers and sells shares of its common stock continuously through a number of distribution channels in ongoing public offerings, and seeks to provide increased liquidity to current and future stockholders through an expansion of the Company’s current share redemption program. On December 18, 2020, the Company filed Amendment No. 1 to the registration statement on Form S-11 with the SEC.

On February 19, 2020, the Company, Pacific Oak SOR II, LLC, an indirect subsidiary of the Company’s (“Merger Sub”), and Pacific Oak Strategic Opportunity REIT II, Inc. (“POSOR II”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). On October 5, 2020, pursuant to the Merger Agreement, POSOR II merged with and into Merger Sub, with Merger Sub surviving as an indirect subsidiary of the Company’s (the “Merger”). At such time, in accordance with the applicable provisions of the Maryland General Corporation Law and the Maryland Limited Liability Company Act, the separate existence of POSOR II ceased. At the effective time of the Merger, each issued and outstanding share of POSOR II’s common stock (or a fraction thereof), $0.01 par value per share, converted into 0.9643 shares of the Company’s common stock, $0.01 par value per share, or 28,973,905 shares of the Company’s common stock. The combined company after the Merger retained the name “Pacific Oak Strategic Opportunity REIT, Inc.” The Merger was intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended. As a result of the Merger, the Company acquired two hotel properties, three office properties, one apartment building, one consolidated joint venture to develop one office/retail property, two real estate equity securities and two investments in unconsolidated entities. Additionally, the Company assumed $331.8 million of loans related to the acquired properties.

On March 4, 2021, Pacific Oak SOR BVI issued additional Series A Debentures in the amount of 250.0 million Israeli new Shekels par value through a private placement. The additional Series A Debentures were issued at a 1.9% discount resulting in total consideration of 245.3 million Israeli new Shekels ($74.2 million as of March 4, 2021). The additional Series A Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series A Debentures, which were initially issued, without any right of precedence or preference between any of them.

As of September 30, 2021, the Company consolidated eight office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, two apartment properties, two hotel properties, one residential home portfolio consisting of 1,806 single-family homes, three investments in undeveloped land with approximately 800 developable acres, and owned four investments in unconsolidated entities and three investments in real estate equity securities. Additionally, as of September 30, 2021, the Company had entered into a consolidated joint venture to develop one office/retail property.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2020. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC.

8

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.     Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2021

(unaudited)

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the FASB Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, Pacific Oak SOR BVI and their direct and indirect wholly owned subsidiaries, joint ventures in which the Company has a controlling interest and VIEs in which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation.

Liquidity

The Company generally finances its real estate investments using notes payable that are typically structured as non-recourse secured mortgages with maturities of approximately three to five years, with short term extension options available upon the Company meeting certain debt covenants. Each reporting period management evaluates the Company’s ability to continue as a going concern by evaluating conditions and events, including assessing the liquidity needs to satisfy upcoming debt obligations and the ability to satisfy debt covenant requirements. Through the normal course of operations and as further discussed in Note 7, the Company has $518.0 million of debt obligations coming due over the next 12-month period. In order to satisfy obligations as they mature, management will evaluate its options and may seek to utilize extension options available in the respective loan agreements, may make partial loan paydowns to meet debt covenant requirements, may seek to refinance certain debt instruments, may sell real estate equity securities to convert to cash to make principal payments, may market one or more properties for sale or may negotiate a turnover of one or more secured properties back to the related mortgage lender and remit payment for any associated loan guarantee. Historically, the Company has successfully refinanced debt instruments or utilized extension options in order to satisfy debt obligations as they come due and has not negotiated a turnover of a secured property back to a lender, though the Company may utilize such option if necessary. Based upon these plans, management believes it will have sufficient liquidity to satisfy its obligations as they come due and to continue as a going concern. There can be no assurance as to the certainty or timing of any of management’s plans. Refer to Note 7 for further discussion.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Restricted Cash

Restricted cash is comprised of lender impound reserve accounts on the Company’s borrowings for security deposits, property taxes, insurance, debt service obligations and capital improvements and replacements.

9

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.     Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2021

(unaudited)

Redeemable Common Stock

The Company limits the dollar value of shares that may be redeemed under the share redemption program. During the nine months ended September 30, 2021, the Company had redeemed $29.6 million of common stock under the share redemption program. The Company processed all redemption requests received in good order and eligible for redemption through the September 2021 redemption date, except for 13,913,664 shares totaling $128.0 million due to the limitations under the share redemption program. The Company recorded $3.4 million and $0.9 million of redeemable common stock payable on the Company’s balance sheet as of September 30, 2021 and December 31, 2020, respectively, related to unfulfilled redemption requests received in good order under the share redemption program. Based on the twelfth amended and restated share redemption program, the Company has $3.2 million available for redemptions in the remainder of 2021, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence,” subject to the limitations under the share redemption program.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of the prior period. During the nine months ended September 30, 2021, the Company sold one office property. As a result, certain assets and liabilities were reclassified as held for sale on the consolidated balance sheets for the prior period.

Segments

The Company operates in three reportable business segments: opportunistic real estate and real estate-related investments, single-family homes, and hotels, which is how the Company's management manages the business. In general, the Company intends to hold its investments in opportunistic real estate and other real estate-related assets for capital appreciation. Traditional performance metrics of opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views opportunistic real estate and other real estate-related assets as similar investments and aggregated into one reportable business segment. The Company owns single-family homes in 17 markets and are all aggregated into one reportable business segment due to the homes being stabilized, having high occupancy rates and have similar economic characteristics. Additionally, the Company owns two hotels and are aggregated into one reportable business segment due to the nature of the hotel business with short-term stays.

Per Share Data

The Company applies the two-class method when computing its earnings per share. Net income per share for each class of stock is calculated by assuming all of the Company’s net income (loss) is distributed to each class of stock based on their contractual rights.

Unvested restricted stock that contains non-forfeitable rights to distributions (whether paid or unpaid) are considered participating securities and are included in the computation of earnings per share.

Basic earnings (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted earnings (loss) per share of common stock is computed based on the weighted-average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock, using the more dilutive of either the two-class method or the treasury stock method.

10

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.     Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2021

(unaudited)

The noncontrolling Pacific Oak Residential Trust, Inc. (“PORT”) Series A convertible redeemable preferred shares are not included as the preferred shares are convertible contingent on the common stock of PORT being publicly traded. If PORT common stock becomes publicly traded, the per-share earnings of PORT will be included in the Company’s EPS computations based on the consolidated holdings of PORT.

The Company’s unvested Restricted Stock have been included in the calculation of basic and diluted earnings per share for both of the three and nine months ended September 30, 2021 and 2020, as the restriction is not contingent on any conditions except the passage of time.

There were no distributions declared for both of the three and nine months ended September 30, 2021 and 2020, with the exception of distributions declared per share of $0.0086 during the three months ended March 31, 2020.

Square Footage, Occupancy and Other Measures

Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Recently Issued Accounting Standards Updates

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU No. 2020-04”) contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the nine months ended September 30, 2021, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. For the period from January 1, 2020 (the earliest date the Company may elect to apply ASU No. 2020-04) through September 30, 2021, the Company did not have any contract modifications that meet the criteria described above, specifically contract modifications that have been modified from LIBOR to an alternative reference rate. The Company’s loan agreements, derivative instruments, and certain lease agreements use LIBOR as the current reference rate. For eligible contract modifications, the Company expects to adopt the temporary optional expedients described in ASU No. 2020-04. The optional expedients for hedging relationships described in ASU No. 2020-04 are not expected to have an impact to the Company, as the Company has elected to not designate its derivative instruments as a hedge.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.     Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2021

(unaudited)

3. REAL ESTATE HELD FOR INVESTMENT

As of September 30, 2021, the Company owned eight office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, encompassing, in the aggregate, approximately 3.3 million rentable square feet. As of September 30, 2021, these properties were 73% occupied. In addition, the Company owned one residential home portfolio consisting of 1,806 single-family homes and encompassing approximately 2.5 million rental square feet and two apartment properties, containing 609 units and encompassing approximately 0.5 million rentable square feet, which was 94% and 96% occupied, respectively as of September 30, 2021. As of September 30, 2021, the Company also owned two hotel properties with an aggregate of 649 rooms and three investments in undeveloped land with approximately 800 developable acres. Additionally, as of September 30, 2021, the Company had entered into a consolidated joint venture to develop one office/retail property. The following table summarizes the Company’s real estate held for investment as of September 30, 2021 and December 31, 2020, respectively (in thousands):

	September 30, 2021		December 31, 2020
Land	$	275,419	$	288,514
Buildings and improvements	1,018,850		1,019,329
Tenant origination and absorption costs	44,527		50,881
Total real estate, cost	1,338,796		1,358,724
Accumulated depreciation and amortization	(119,265)